The post-COVID-19 world
The SARS-CoV-2 coronavirus won’t give us any reprieve this year. But even if the pandemic is likely to be over 12 to 18 months from now, many social-distancing behavior patterns will persist. Whoever has grown accustomed to working from home, doing weekend shopping online and spending movie night on the sofa with Netflix will probably (want to) continue to do that in the future. As with any structural change, there will be losers and winners also in the post-COVID-19 world. Office and commercial real estate and the business travel market look destined to rank among the biggest losers. The list of clear winners, in contrast, includes the technology sector, in which Kaiser Partner Privatbank AG offers a dedicated equity investment strategy.
A sea change
The SARS-CoV-2 coronavirus has turned the world topsy-turvy since February. All around the globe, people temporarily have been forced to shelter at home and businesses have had to scramble to shift their operations to remote mode, and the term “social distancing” has since become part of our everyday vocabulary. Some sectors such as online shopping and videoconferencing software vendors have registered meteoric jumps in revenue in some instances. But how many of the compelled (behavioral) changes are permanent? And how should investors position themselves to profit from the trends in the sectors most affected by those changes?
If the quest for a vaccine against COVID-19 produces a successful outcome, the pandemic could very well be history 12 to 18 months from now. Concerns about another infection wave or the emergence of a new virus and an attendant outbreak of a new epidemic admittedly are unlikely to vanish all that quickly, and a seasonal recurrence of COVID-19 cannot be ruled out at present. Humans, however, are creatures of habit. Hence, sooner likelier than later, people are bound to resume gathering in crowded spaces and look poised to start traveling again. But not everything will return to the status quo ante. Whoever has grown accustomed to working from home, doing weekend shopping online and spending movie night on the sofa with Netflix will probably (want to) continue to do that in the future. Businesses are likely to fine-tweak their terms of employment and review their supply chains. Issues like health security and education also look set to get rethought. None of these trends are new. In fact, e-commerce, working from home and reshoring production are some examples of trends that have been continually gaining momentum for years now. The coronavirus pandemic, however, is bound to lastingly accelerate these structural changes.
“Corona facts” and their implications
Remote work from home
Working from home has been technologically feasible for a long time now. According to a study by J. Dingel and B. Neiman, 37% of all jobs in the USA can be performed entirely from home. That figure includes, among other things, most of the jobs in the education and finance sectors and managerial functions in general. This means that a whopping 45% or so of all jobs in Switzerland could be performed from home offices. Real-life practice looked different, though, prior to the pandemic because remote work theretofore was not an option for many companies. COVID-19 changed that practically overnight. At the peak of the crisis, more than a third of all employees actually worked from home in some industrialized countries. That number was even above 50% in the Netherlands and Finland. The advantages of working from home appear obvious: fewer meetings, less distractions and higher productivity. Ideally, employees gain a better quality of life and greater autonomy while companies get more satisfied workers and can save office space. However, working from home also has its “costs”. (Informal) dialogue between employees suffers, and spontaneous (business) ideas dreamt up at the coffee vending machine are a rather rare occurrence in the virtual world. Separating private life from work potentially becomes even more difficult. On the whole, though, the advantages of working from home significantly outweigh the drawbacks. Many companies accordingly will adjust their terms of employment (or have already done so). Remote work looks destined to become a normal part of the everyday work routine in many places even after the pandemic is over.
The new normal?
Working from home is no longer fantasy
Percentage of jobs that can be done from home
Sources: „How many jobs can be done at home?” (J. Dingel / B. Neiman), Kaiser Partner Privatbank
E-commerce has been a growth market for years. Online sales in the USA had recently been increasing at a rate of around 15% per annum and lately had accounted for 16% of total US retail sales. And online sales had already made up a quarter of total retail sales in China. The pandemic has now caused a huge burst in growth in recent months. While bricks-and-mortar sales have decreased, online shopping has boomed. Alongside clothing, people now have also been buying more furniture, do-it-yourself materials, groceries and delivered lunches on the internet. The latest data from the US Department of Commerce reveal that online sales rocketed by 44% year-on-year in the second quarter. Will consumers simply revert to their old habits once the coronavirus crisis is over? Quite a few of them are likely to continue to take pleasure in reaching for their smartphones to quickly fill their refrigerators or to order in dinner. And we will probably see additional changes in the shopping theme. The pandemic compelled many small-scale retailers to venture online for the first time, and they have now discovered the power of the internet. As a result, they are likely to become more competitive in the future against Amazon and the like. Shopping in person in the store around the corner or directly from the producer (or from the farmer) is also experiencing a revival under the motto “less global and more local”. Paper money and coins, in contrast, have seen their popularity diminish further. The trend toward contactless payments looks set to further accelerate.
Giant leap in sales
COVID-19 gives online retailing a boost
US online sales growth, in %
Sources: US Commerce Department, Kaiser Partner Privatbank
And even more online…
COVID-19 did more than just cause some shopping activity to shift to the internet. Team meetings, too, now often were no longer being held in offices, but were instead conducted via videoconference. A wide array of other activities – schooling, doctor’s appointments, concerts and even sporting events – likewise underwent a mass migration to the internet. People soon will probably start to prefer watching sporting events live in person again. Online education, however, looks destined to get a further boost in the future. This sector has enormous growth potential. The same goes for telemedicine. Doctors likely will come to appreciate the superior efficiency of practicing medicine via the internet, at least for many relatively simple initial diagnoses. And (elderly) patients likely will often want to spare themselves the tedious trip to the doctor’s office.
The travel market is clearly one of the sectors hit hardest by the coronavirus pandemic, which has hammered everything ranging from travel agencies to hotels and airlines. Worldwide flight traffic plummeted by up to 70% at the peak of the public health crisis and has recently climbed back to just around 50% of the pre-crisis level. It’s highly unlikely, though, that hardly anyone will want to travel in the future. Just as humans are creatures of habit, we are also prone to forget quickly. But after previous shocks to global tourism such as 9/11 or the SARS epidemic, it took two to three years for air traffic volume to resume its pre-crisis trend. The future of business travel, however, may look different. Whoever has succeeded in peddling his products by videocall in recent months is likely to see less need in the future to physically meet with customers. Conferences, expos and other business events may also increasingly be held online in the near future. Travel budgets are a big expense item for many companies, and the availability of “virtual” alternatives presents a good reason for cutting travel costs. It doesn’t take much imagination to picture a permanent decrease in business travel.
…and slow recovery
Worldwide air traffic
Sources: OAG, Kaiser Partner Privatbank
Supply chains and supply security
Companies in the USA and Europe are bound to do a lot of rethinking about more than just job locations and communication. The pandemic has also pointed out to them just how vulnerable their complex supply chains are. Public and political pressure could prompt them to reshore at least part of their production. The fragility of supply chains in the healthcare sector was the most striking revelation. Although the USA spends by far the most worldwide on research and development, it was unable to supply adequate quantities of critical medical materials such as respiratory masks, test kits and ventilators at the start of the crisis, mainly because around 70% of the production of essential medical equipment and pharmaceutical ingredients comes from overseas. The outbreak of COVID-19 prompted countries like China and India to protect their own populations first and forced the US government to make (expensive) emergency deals. Once the public health crisis is over, if not before, some corporate executives will have to ask themselves whether it still makes sense to own a lot of intellectual capital but to often have production operations spread all around the globe. What if there’s a new pandemic, a natural catastrophe or a grave escalation of the conflict between the USA and China? Complex supply chains can’t be reengineered overnight. Companies therefore will opt in the future to build at least some of their factories in the USA or Europe, with a high degree of automation and with encouragement (and financial support) from government policymakers.
The social and economic changes described above look destined to exert an impact on a variety of industries and business sectors. As is so often the case, wherever there are winners there are also losers. The market for office and commercial real estate ranks among the likeliest losers. Since the trend toward working from home or working remotely looks set to continue, demand for expensive prime office locations in the center of large cities will decrease. An office workspace for an employee in Manhattan, for example, cost around USD 20,000 per year on average prior to the crisis. That’s a lot of money that could be saved by shifting more to teleworking. Some banks like Barclays have already announced their intention to reduce their number of jobs located in major financial centers. A further migration to the internet will also put downward pressure on prices for retailing space. And demand for housing in prime urban locations ultimately could also diminish in the longer term because whoever works from home no longer needs to live near his employer. Real estate developers that heretofore have concentrated exclusively on large cities must do some rethinking. A permanent decrease in business travel would hit airlines hard because although (frequent) business flyers account for only around 12% of all flight tickets sold, they generate up to 70% of airlines’ profits. And a lot more than that – hotels, restaurants, car rental agencies and even Airbnb –relies on business travelers as well. Extending business trips for personal purposes will also be done less frequently if one doesn’t fly in the first place and instead does a lot of work by videoconferencing.
The term “videoconferencing” identifies one of the big winners of the pandemic. Videoconferencing provider Zoom has rapidly evolved from a niche player to a mainstream tool. More and more people are Zooming today – the number of users has surged from 10 million in December 2019 to 300 million as of April 2020. And whoever has concerns about data security perhaps resorts to the competing product from Microsoft (MS Teams). Communication, remote work from home, streaming entertainment and a lot more – technology (in the broader sense) will gain even greater importance in the post-COVID-19 world. Technology companies therefore continue to have good business and share-price prospects. Kaiser Partner Privatbank AG anticipated this trend and has pinpointed specific potential winners with its dedicated Disruptive Technologies equity investment strategy.
Even though a lot of the good news appears to be priced in already in the wake of the recent vibrant rally, the current valuation of the tech sector is a far cry from the bubble level seen at the turn of the millennium. Quite the contrary, in fact, “tech” these days is synonymous not only with robust growth, but often also with strong balance sheets and opulent earnings (at least at the established tech players). A general rotation away from these growth stocks is unlikely to take place until the promised growth is no longer delivered, which is not in sight (yet). A tightening of regulations, such as mind games about breaking up Google or Amazon or introducing a global tax on tech profits, poses another risk, though there are no immediate prospects of any of that happening. Software, by the way, is unlikely to be the lone winner. Demand for technological hardware will also increase in the future. The trends toward deglobalization and reindustrialization are engendering greater demand for automation and robotics. The USA in particular still has a lot of catching up to do here (compared to South Korea, Germany and Japan).
Still not expensive
The valuation of the technology sector is moderate in historical comparison
US technology sector’s price/earnings ratio
Sources: Bloomberg, Kaiser Partner Privatbank